It’s been a volatile start to the year for the financial markets, but the Nasdaq Composite (QQQ) has helped to pull the major averages out from under the rubble, with some stocks providing clues that they might be the new market leaders. While the large-cap leaders are quite obvious, with Amazon (AMZN) and Netflix (NFLX) blasting to new highs in Q1, the small and mid-cap tech stocks have gone under the radar a little, though are beginning to get more coverage recently. Based on early technical strength from Everbridge (EVBG) and Docusign (DOCU), these two names look like they could be new market leaders, and should have a lot more gas in the tank long-term if this the case.
The key to finding the new market leaders after a significant downdraft is typically looking for high-growth, both in earnings power and in revenues. When it comes to Docusign and Everbridge, the former saw massive earnings growth in FY-2020, and a 40% revenue growth rate with stable margins suggests that there’s more earnings growth to come. Meanwhile, while Everbridge does not have positive earnings yet, the company continues to see robust revenue growth, with revenue growth rates accelerating in the most recent quarter by 200 basis points to 37%. Both of these names have shown exceptional technical strength in the face of near-unprecedented selling pressure in the markets, suggesting that they are likely to be new market leaders. Let’s take a look at each of them in a little more detail below:
(Source: Company Website)
Beginning with Docusign, the impressive relative strength should be evident, as the stock did not even re-enter its primary IPO base during the mid-March market crash, and blasted to new all-time highs in April with ease. This is extreme and unusual strength given that the Nasdaq Composite remains more than 10% off of its old highs, and it suggests that Docusign does not need the market to participate for it to head higher. The fact that the stock is performing so well during this COVID-19 pandemic should not be a surprise as while human contact outside of close family has come to a near halt; business has not. Fortunately, Docusign answers this problem with its E-signature products, which allow for deals to be completed
digitally vs. face to face. Let’s take a look at the company’s growth metrics below:
As we can see from the below chart of Docusign’s annual earnings per share [EPS], the company finally swung to profitability in FY-2019 and enjoyed over 240% growth in earnings in FY-2020. This is incredible growth for any company, let alone a mid-cap tech company, and FY-2021 estimates are expecting this trend to continue, with FY-2020 annual EPS forecasts of $0.54. Assuming the company hits these estimates, this would translate to 74% growth year-over-year, on the back of an explosive triple-digit growth rate that the company is lapping. Therefore, while DOCU might look expensive at over 300x FY-2019 earnings, it looks much cheaper if we factor in the possibility that it could be earning nearly $1.00 per share by FY-2022. Typically, the best growth stocks look far too expensive early on, but they’re expensive for a reason. When it comes to high double-digit and triple-digit earnings growth rates with game-changing products that change how we do day-to-day activities, the key is finding an ideal entry, not worrying about high P/E ratios. Based on these growth rates, I would not be surprised to see DOCU hit $140.00 per share in the next 12 months.
(Source: YCharts.com, Author’s Chart)
Moving over to Everbridge, the company is more obscure at just below a $5 billion market cap, with products that focus on better operational efficiency and response across several industries. Similar to Docusign, the stock showed extreme strength during the Q1 market sell-off, as it did not even re-enter its prior weekly base, but instead begun to build a new base at all-time highs. Year-to-date, the stock is up an incredible 45% vs. the Nasdaq’s negative return, suggesting that funds are piling into the stock and are quick to support it on dips.
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